TEST OF RANDOM WALK ON SELECTED STOCK MARKETS IN AFRICA
Keywords:
Random walk hypothesis, efficient market theory, all-share index, market returns, buy and hold’ strategy, stock exchange, investors’ behaviours
Abstract
This study investigated the efficiency market theory in four (4) selected African stock markets (Nigeria, South Africa, Kenya and Morocco) proxied by their All-share indices from the perspective of random walk hypothesis using the variance ratio tests. Daily market returns data from 01/02/2012 to 26/03/2020 obtained from the individual national stock markets via their official websites was employed. The findings of the study evince that over the study period, the daily returns movement on Nigeria stock exchange All-share index is affected by historical price information; hence, Nigeria stock market follows the random walk pattern whereas the daily returns movement on South Africa FTSE-JSE stock exchange index, Kenya (Nairobi) stock exchange index and Morocco (Casablanca) stock exchange index are not affected by historical price information; hence, South Africa, Kenya and Morocco stock markets do not follow the random walk pattern. We therefore conclude that African stock markets are largely inefficient; hence, they are characterized by market anomalies and momentum effects implying that financial resources are not efficiently and effectively mobilized. Also, there is lack of evidence of weak form efficiency in African markets which also implies the existence of arbitrage opportunities which would lead to abnormal returns or profits if well exploited. From the findings of this study, we recommend amongst others that there is need for investors and traders in the African stock markets to exploit the existing arbitrage opportunities that are created by market anomalies in order to possibly beat the stock markets and earn abnormal returns. This can be achieved by using market trading strategies that are consistent with technical analysis such as day-of-the week momentum strategy.
Downloads
Download data is not yet available.
References
Adelegan, O. J. (2003). Capital market efficiency and the effects of dividend announcements on share prices in Nigeria. African Development Review, 15(3), 218-236.
Ali, S. S. & Mustafa, K. (2001). Testing semi-strong form efficiency of stock market. The Pakistan Development Review, 40(4), 651-74.
Amadou, B. (2021). Market efficiency theory in African markets. Young African Leaders Journal of Development, 3(34), 239-252. Retrieved fromhttps://digitalcommons.kennesaw.edu/yaljod/vol3/iss1/34
Andabai, P. W. (2019). Weak form efficient market hypothesis in the Nigerian stock market: An empirical investigation. Online Journal of Arts, Management and Social Sciences, 4(1), 174-181.
Appiah-Kusi, J., Menyah, K. (2003). Return predictability in African Stock Markets. Review of Financial Economics, 12, 247-270.
Azubuike, S. A. (2015). Tests of random walk and efficient market hypothesis in developing economies: Evidence from Nigerian capital market. International Journal of Management Sciences, Research Academy of Social Sciences, 5(1), 1-53.
Bachelier, L. (1900). Theory de la speculation, Annales scientifiques de l’EcoleNormaleSuperieure, 21-86.
Balparda, B., Caporale, G. M. & Gil-Alana, L. A. (2015). The Kenyan stock market: Inefficiency, long memory, persistence and anomalies in the NSE-20. African Journal of Economic and Sustainable Development, 4(3), 254-277.
Bryman, A. (2012). Social research methods. New York: Oxford university press.
Bulla, D. (2015). Random walk hypothesis in emerging stock market: Evidence from Nairobi Securities Exchange. International Journal of Economics, Finance and Management, 4(2).
Bundoo, S. (2000). The Mauritius Stock Exchange: An assessment. Social Sciences and Humanities and Law and Management research Journal, 3, 67-80.
Cavin, O. O. & Philip, N. (2020). Testing weak form of market efficiency of exchange traded funds at the NSE Market. Journal of Finance and Economics, 8(6), 250-257. doi: 10.12691/jfe-8-6-3.
Cherono, I. (2020). Investor behaviour and stock market reaction in Kenya. European Journal of Economic and Financial Research, 4(2).
Chow, K. V. & Denning, K. C. (1993). A simple multiple variance ratio test. Journal of Econometrics, 58(3), 385-401.
David, D. V., Natalya, A. & Andrew, P. (2020). Unobserved structural shifts and asymmetries in the random walk model for stock returns in African frontier markets. Cogent Economics & Finance, 8(1), 1-16. DOI: 10.1080/23322039.2020.1769348
Dickinson, J. P. & Muragu, K. (1994). Market efficiency in developing countries: A case study of the Nairobi Stock Exchange Journal of Business Finance & Accounting, 21(1), 133-150.
Ejem, C. A., Ogbonna, U. G. & Okpara, C. G. (2020). Efficient market hypotheses controversy and Nigerian stock exchange relations. International Journal of Accounting, Finance and Risk Management, 5(3), 131.
Emmanuel, J. A. A., Paul, A., Mensah, L. & Ohene-Asare, K. (2018). Non-linear approach to random walk test in selected African countries. International Journal of Managerial Finance, Emerald Group Publishing Limited, 14(3), 362-376. RePEc:eme:ijmfpp:ijmf-10-2017-0235. DOI 10.1108/IJMF-10-2017-023
Eugene, F. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34-105.
Falloul, E. M. (2020). Test of weak efficiency on Casablanca stock market, Chaotic dynamic and long memory. Global Journal of Management and Business Research, 20(3), 1-16.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance,25(2), 383 – 417. http://dx.doi.org./10.2307/2325486
Fisher, D. E. & Jordan, R. J. (2005). Security analysis and portfolio management,Partparganji, Delhi: Pearson Education.
Fusthane, O. &Kapingura, F. M. (2017). Weak form market efficiency of the Johannesburg stock exchange: Pre, during and post the 2008 global financial crisis. Journal of Economics and Behavioral Studies, 9(5), 29-42.
Gbalam, P. E. & Nelson, J. (2019). Testing the weak form efficiency of the Nigeria stock exchange market. European Journal of Accounting, Auditing and Finance Research, 7(10), 10-22.
Gimba, V. K. (2012). Testing the weak-form efficiency market hypothesis: Evidence from Nigerian stock market. CBN Journal of Applied Statistics, 3(1), 117-136.
Graham, S.& Gillian, R. (2006). Variance ratio tests of the random walk hypothesis for South African stock futures. South African Journal of Economics, 74(3), 410-421. https://doi.org/10.1111/j.1813-6982.2006.00081.x
Grater, E. & Struweg, J. (2015). Testing weak form efficiency in the South African market. Journal of Economic and Financial Sciences, 8(2), 621-632.
Gupta, R. &Basu, P. (2007). Weak form efficiency in Indian stock markets. International Business and Economics Research Journal, 6, 57-64.
Gyamfi, N. E., Kyei, K. A. & Gill, R. (2016). African stock markets and return predictability. Journal of Economics and Behavioral Studies, 8(5), 91-99.
Kamau, A. M. (2017). An empirical analysis of the weak form efficient market hypothesis of the Nairobi securities exchange (Doctoral dissertation).
Kiran, M. S. S., Mallikarjuna, M. & Rao, R. P. (2019). Testing the weak-form efficiency of BRICS stock markets. Asian Journal of Economics, Finance and Management, 115-123.
Lekhal, M. & El Oubani, A. (2020). Does the adaptive market hypothesis explain the evolution of emerging markets efficiency? Evidence from the Moroccan financial market. Heliyon, 6(7), e04429.
Lo, A. W. &MacKinlay, A. C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test. The Review of Financial Studies, 1(1), 41-66.
Magnusson, A., M. &Wydick, B. (2002). How efficient are Africa's emerging stock markets? The University of San Francisco. Gleeson Library. GeschkeCenter. College of Arts and Sciences. Journal of Development Studies, 38(4), 41-156. DOI: 10.1080/00220380412331322441
Malkiel, B. (2003). The efficient market hypothesis and its critics. Journal of economic perspective, 17, 59-82. http://dx.doi.org/10.1257/089533003321164958
Mangeni, W. & Mike, O. (2018). The weekend effect: An exploitable anomaly on the average returns of Nairobi securities exchange. Journal of International Business, Innovation and Strategic Management, 2(2), 37-51.
Masud, P., Md. Harun. U. R., Md. Asad. I. C. &Mahbubur, R. (2018). Predicting the stock market efficiency in weak form: A study on Dhaka stock exchange. International Journal of Economics and Financial Issues, Econ. Journals, 8(5), 88-95.
Mayowa, G. A. & Richard, O. (2012). Testing the weak form of efficient market hypothesis in Nigerian capital market. Sciedu Press, Accounting and Finance Research, 169 - 179 URL:http://dx.doi.org/10.5430/afr.v1n1p169
Mishra, K. (2009). Indian capital market-revisiting market efficiency. Indian Journal of Capital Markets, 2, 30-34.
Muhammad, Z. Y. & Rashid, M. (2018). Examining the efficiency of American stock exchange NASDAQ: An empirical analysis of the market efficiency hypothesis. Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), 3, 132-137.
Ntim, C., G., Opong, K., k., Danbolt, J. &Dewotor, F. (2011). Testing the weak-form efficiency in African stock markets. Managerial Finance, 195-218. DOI: 10.1108/03074351111113289
Nwosu, E. O., Orji, A. &Anagwu, O. (2013). African emerging equity markets re‐examined: Testing the weak form efficiency theory. African Development Review, 25(4), 485-498.
Ogbonna, U. G. &Ejem, C. A. (2020). Nigerian stock exchange and weak form efficiency. Research Journal of Finance and Accounting, 11(8), 83-94.
Ogbulu, O. (2016). Weak form market efficiency, estimation interval and the Nigerian stock exchange: Empirical evidence. International Journal of Economics and Business, 5, 84-116.
Olowe, R. A. (1999). Weak form efficiency of the Nigerian stock market: Further evidence. African Development Review, 11(1), 54-68. https://doi.org/10.1111/1467-8268.00003
Onyuma, S. O. (2009). Day-of-the-week and month-of-the-year effect on the Kenyan stock market returns. Eastern Africa Social Science Research Review, 25(2), 53-74.
Osabuohien-Irabor, O. (2020). Unit root tests in the presence of structural breaks: Evidence from African stock markets. Economic Journal of Emerging Markets, 12(2), 119-137.
Rapuluchukwu, E. (2010). The efficient market hypothesis: Realities from the Nigerian stock market. Global Journal of Finance and Management, 2(2), 321 -331.
Reilly, F. K. (1989). Investment analysis and portfolio management, Hinsdale, Illinois: Dryden Press.
Rui, D. & Hortense, S. (2020). Stock market efficiency in Africa: Evidence from random walk hypothesis. Conference Proceedings/ 6th International Scientific-Business Conference. Leadership, Innovation, Management and Economics: Integrated Politics of Research, 25-38. Online-virtual, November, 26, 2020. DOI: https://doi.org/10.31410/LIMEN.2020.25.
Samuels, J. M. & Wilkes, R. (1981). Management of company finance, Lagos.
Simons, D. N. & Laryea, S. (2005). Testing the efficiency of African markets. Available at SSRN 874808.
Smith, G., Jefferis, K. &Ryoo, H. J. (2002). African stock markets: Multiple variance ratio tests of random walks. Applied Financial Economics, 12(7), 475-484.
Thomas, N. S. G. (1990). Investments, London: Glenview.
Tiwari, A. K., Aye, G. C. & Gupta, R. (2019). Stock market efficiency analysis using longspans of data: A multifractal detrended fluctuation approach. Finance Research Letters, 28, 398-411.
Vitali, F. &Mollah, S. (2010). Stock market efficiency in Africa: Evidence from random walk hypothesis. South Western Finance, 1-54.
Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18(5), 931-955.
Ali, S. S. & Mustafa, K. (2001). Testing semi-strong form efficiency of stock market. The Pakistan Development Review, 40(4), 651-74.
Amadou, B. (2021). Market efficiency theory in African markets. Young African Leaders Journal of Development, 3(34), 239-252. Retrieved fromhttps://digitalcommons.kennesaw.edu/yaljod/vol3/iss1/34
Andabai, P. W. (2019). Weak form efficient market hypothesis in the Nigerian stock market: An empirical investigation. Online Journal of Arts, Management and Social Sciences, 4(1), 174-181.
Appiah-Kusi, J., Menyah, K. (2003). Return predictability in African Stock Markets. Review of Financial Economics, 12, 247-270.
Azubuike, S. A. (2015). Tests of random walk and efficient market hypothesis in developing economies: Evidence from Nigerian capital market. International Journal of Management Sciences, Research Academy of Social Sciences, 5(1), 1-53.
Bachelier, L. (1900). Theory de la speculation, Annales scientifiques de l’EcoleNormaleSuperieure, 21-86.
Balparda, B., Caporale, G. M. & Gil-Alana, L. A. (2015). The Kenyan stock market: Inefficiency, long memory, persistence and anomalies in the NSE-20. African Journal of Economic and Sustainable Development, 4(3), 254-277.
Bryman, A. (2012). Social research methods. New York: Oxford university press.
Bulla, D. (2015). Random walk hypothesis in emerging stock market: Evidence from Nairobi Securities Exchange. International Journal of Economics, Finance and Management, 4(2).
Bundoo, S. (2000). The Mauritius Stock Exchange: An assessment. Social Sciences and Humanities and Law and Management research Journal, 3, 67-80.
Cavin, O. O. & Philip, N. (2020). Testing weak form of market efficiency of exchange traded funds at the NSE Market. Journal of Finance and Economics, 8(6), 250-257. doi: 10.12691/jfe-8-6-3.
Cherono, I. (2020). Investor behaviour and stock market reaction in Kenya. European Journal of Economic and Financial Research, 4(2).
Chow, K. V. & Denning, K. C. (1993). A simple multiple variance ratio test. Journal of Econometrics, 58(3), 385-401.
David, D. V., Natalya, A. & Andrew, P. (2020). Unobserved structural shifts and asymmetries in the random walk model for stock returns in African frontier markets. Cogent Economics & Finance, 8(1), 1-16. DOI: 10.1080/23322039.2020.1769348
Dickinson, J. P. & Muragu, K. (1994). Market efficiency in developing countries: A case study of the Nairobi Stock Exchange Journal of Business Finance & Accounting, 21(1), 133-150.
Ejem, C. A., Ogbonna, U. G. & Okpara, C. G. (2020). Efficient market hypotheses controversy and Nigerian stock exchange relations. International Journal of Accounting, Finance and Risk Management, 5(3), 131.
Emmanuel, J. A. A., Paul, A., Mensah, L. & Ohene-Asare, K. (2018). Non-linear approach to random walk test in selected African countries. International Journal of Managerial Finance, Emerald Group Publishing Limited, 14(3), 362-376. RePEc:eme:ijmfpp:ijmf-10-2017-0235. DOI 10.1108/IJMF-10-2017-023
Eugene, F. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34-105.
Falloul, E. M. (2020). Test of weak efficiency on Casablanca stock market, Chaotic dynamic and long memory. Global Journal of Management and Business Research, 20(3), 1-16.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance,25(2), 383 – 417. http://dx.doi.org./10.2307/2325486
Fisher, D. E. & Jordan, R. J. (2005). Security analysis and portfolio management,Partparganji, Delhi: Pearson Education.
Fusthane, O. &Kapingura, F. M. (2017). Weak form market efficiency of the Johannesburg stock exchange: Pre, during and post the 2008 global financial crisis. Journal of Economics and Behavioral Studies, 9(5), 29-42.
Gbalam, P. E. & Nelson, J. (2019). Testing the weak form efficiency of the Nigeria stock exchange market. European Journal of Accounting, Auditing and Finance Research, 7(10), 10-22.
Gimba, V. K. (2012). Testing the weak-form efficiency market hypothesis: Evidence from Nigerian stock market. CBN Journal of Applied Statistics, 3(1), 117-136.
Graham, S.& Gillian, R. (2006). Variance ratio tests of the random walk hypothesis for South African stock futures. South African Journal of Economics, 74(3), 410-421. https://doi.org/10.1111/j.1813-6982.2006.00081.x
Grater, E. & Struweg, J. (2015). Testing weak form efficiency in the South African market. Journal of Economic and Financial Sciences, 8(2), 621-632.
Gupta, R. &Basu, P. (2007). Weak form efficiency in Indian stock markets. International Business and Economics Research Journal, 6, 57-64.
Gyamfi, N. E., Kyei, K. A. & Gill, R. (2016). African stock markets and return predictability. Journal of Economics and Behavioral Studies, 8(5), 91-99.
Kamau, A. M. (2017). An empirical analysis of the weak form efficient market hypothesis of the Nairobi securities exchange (Doctoral dissertation).
Kiran, M. S. S., Mallikarjuna, M. & Rao, R. P. (2019). Testing the weak-form efficiency of BRICS stock markets. Asian Journal of Economics, Finance and Management, 115-123.
Lekhal, M. & El Oubani, A. (2020). Does the adaptive market hypothesis explain the evolution of emerging markets efficiency? Evidence from the Moroccan financial market. Heliyon, 6(7), e04429.
Lo, A. W. &MacKinlay, A. C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test. The Review of Financial Studies, 1(1), 41-66.
Magnusson, A., M. &Wydick, B. (2002). How efficient are Africa's emerging stock markets? The University of San Francisco. Gleeson Library. GeschkeCenter. College of Arts and Sciences. Journal of Development Studies, 38(4), 41-156. DOI: 10.1080/00220380412331322441
Malkiel, B. (2003). The efficient market hypothesis and its critics. Journal of economic perspective, 17, 59-82. http://dx.doi.org/10.1257/089533003321164958
Mangeni, W. & Mike, O. (2018). The weekend effect: An exploitable anomaly on the average returns of Nairobi securities exchange. Journal of International Business, Innovation and Strategic Management, 2(2), 37-51.
Masud, P., Md. Harun. U. R., Md. Asad. I. C. &Mahbubur, R. (2018). Predicting the stock market efficiency in weak form: A study on Dhaka stock exchange. International Journal of Economics and Financial Issues, Econ. Journals, 8(5), 88-95.
Mayowa, G. A. & Richard, O. (2012). Testing the weak form of efficient market hypothesis in Nigerian capital market. Sciedu Press, Accounting and Finance Research, 169 - 179 URL:http://dx.doi.org/10.5430/afr.v1n1p169
Mishra, K. (2009). Indian capital market-revisiting market efficiency. Indian Journal of Capital Markets, 2, 30-34.
Muhammad, Z. Y. & Rashid, M. (2018). Examining the efficiency of American stock exchange NASDAQ: An empirical analysis of the market efficiency hypothesis. Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), 3, 132-137.
Ntim, C., G., Opong, K., k., Danbolt, J. &Dewotor, F. (2011). Testing the weak-form efficiency in African stock markets. Managerial Finance, 195-218. DOI: 10.1108/03074351111113289
Nwosu, E. O., Orji, A. &Anagwu, O. (2013). African emerging equity markets re‐examined: Testing the weak form efficiency theory. African Development Review, 25(4), 485-498.
Ogbonna, U. G. &Ejem, C. A. (2020). Nigerian stock exchange and weak form efficiency. Research Journal of Finance and Accounting, 11(8), 83-94.
Ogbulu, O. (2016). Weak form market efficiency, estimation interval and the Nigerian stock exchange: Empirical evidence. International Journal of Economics and Business, 5, 84-116.
Olowe, R. A. (1999). Weak form efficiency of the Nigerian stock market: Further evidence. African Development Review, 11(1), 54-68. https://doi.org/10.1111/1467-8268.00003
Onyuma, S. O. (2009). Day-of-the-week and month-of-the-year effect on the Kenyan stock market returns. Eastern Africa Social Science Research Review, 25(2), 53-74.
Osabuohien-Irabor, O. (2020). Unit root tests in the presence of structural breaks: Evidence from African stock markets. Economic Journal of Emerging Markets, 12(2), 119-137.
Rapuluchukwu, E. (2010). The efficient market hypothesis: Realities from the Nigerian stock market. Global Journal of Finance and Management, 2(2), 321 -331.
Reilly, F. K. (1989). Investment analysis and portfolio management, Hinsdale, Illinois: Dryden Press.
Rui, D. & Hortense, S. (2020). Stock market efficiency in Africa: Evidence from random walk hypothesis. Conference Proceedings/ 6th International Scientific-Business Conference. Leadership, Innovation, Management and Economics: Integrated Politics of Research, 25-38. Online-virtual, November, 26, 2020. DOI: https://doi.org/10.31410/LIMEN.2020.25.
Samuels, J. M. & Wilkes, R. (1981). Management of company finance, Lagos.
Simons, D. N. & Laryea, S. (2005). Testing the efficiency of African markets. Available at SSRN 874808.
Smith, G., Jefferis, K. &Ryoo, H. J. (2002). African stock markets: Multiple variance ratio tests of random walks. Applied Financial Economics, 12(7), 475-484.
Thomas, N. S. G. (1990). Investments, London: Glenview.
Tiwari, A. K., Aye, G. C. & Gupta, R. (2019). Stock market efficiency analysis using longspans of data: A multifractal detrended fluctuation approach. Finance Research Letters, 28, 398-411.
Vitali, F. &Mollah, S. (2010). Stock market efficiency in Africa: Evidence from random walk hypothesis. South Western Finance, 1-54.
Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18(5), 931-955.
Published
2023-07-07
How to Cite
Tobin Obari, D., & Ogechukwu Rita, M. (2023). TEST OF RANDOM WALK ON SELECTED STOCK MARKETS IN AFRICA. GPH-International Journal of Business Management, 6(07), 01-32. https://doi.org/10.5281/zenodo.8123829
Section
Articles
Copyright (c) 2023 Dibiah, Tobin Obari & Mojekwu, Ogechukwu Rita
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Author(s) and co-author(s) jointly and severally represent and warrant that the Article is original with the author(s) and does not infringe any copyright or violate any other right of any third parties and that the Article has not been published elsewhere. Author(s) agree to the terms that the GPH Journal will have the full right to remove the published article on any misconduct found in the published article.
